As the countdown to Budget 2026 begins, the Budget 2026 tax-free limit for salaried individuals is dominating headlines—but a massive shock is waiting for the unwary. While earning up to ₹12 Lakh under the New Tax Regime is supposedly tax-exempt, thousands of investors are falling into the Section 87A Mutual Fund Trap.
This hidden tax cliff emerges because the ₹60,000 rebate does not apply to ‘special rate’ incomes, specifically the LTCG tax on ₹12 lakh income. Consequently, the New Tax Regime vs Mutual Funds 2026 debate has taken a sharp turn: even a small profit from your equity investments can disqualify you from the rebate, leaving you with a surprise tax bill of over ₹60,000. If your earnings have crossed the threshold by even a few thousand rupees, understanding the Section 87A Marginal Relief 2026 calculation is no longer just a financial tip—it is a survival necessity to protect your take-home pay.
What is the Section 87A Mutual Fund Trap in Budget 2026?
The Section 87A Mutual Fund Trap is a tax anomaly where investors earning up to ₹12 Lakh under the New Tax Regime lose their ₹60,000 tax rebate if they have any income from Long-Term Capital Gains (LTCG). Since Section 87A rebates do not apply to “special rate” incomes like equity gains, even a ₹1,000 profit from mutual funds can trigger a full tax liability on your entire income.
How to Calculate Section 87A Marginal Relief 2026?
To calculate Section 87A Marginal Relief 2026, follow these three steps:
- Determine Total Tax: Calculate your total tax on income exceeding ₹12 Lakh (including LTCG).
- Calculate Excess Income: Subtract ₹12,00,000 from your total taxable income.
- Apply Relief: If your total tax is greater than your excess income, your tax is reduced to match the excess income amount, preventing a tax bill that is higher than your actual earnings.
The Math Breakdown: Why ₹12.01 Lakh Can Be More Expensive Than ₹12 Lakh
To understand the Section 87A Mutual Fund Trap, let’s look at two scenarios for a resident individual under the New Tax Regime vs Mutual Funds 2026.
Scenario A: The “Safe” Salaried Earner
- Gross Salary: ₹12,75,000
- Standard Deduction: ₹75,000
- Net Taxable Income: ₹12,00,000
- Tax before Rebate: ₹60,000 (Calculated via the 5% and 10% slabs)
- Section 87A Rebate: ₹60,000 (Full rebate applied)
- Final Tax Payable: ₹0
Scenario B: The “Mutual Fund Trap” Victim
- Gross Salary: ₹11,00,000
- LTCG from Mutual Funds: ₹1,25,000 (After selling equity units)
- Total Income: ₹12,25,000
- The Shock: Because your total income includes LTCG tax on ₹12 lakh income, you are disqualified from the Section 87A rebate on the “special rate” income. Even though your total income is below the effective threshold, you lose the “safety net.”
- Final Tax Payable: ~₹61,500 (Before Marginal Relief)
The Savior: Section 87A Marginal Relief 2026
If you fall into Scenario B, you don’t necessarily have to pay the full ₹61,500. This is where Section 87A Marginal Relief 2026 kicks in. The rule is simple: Your tax cannot exceed the amount by which your income exceeds the limit.
| Income Level | Tax Without Relief | Tax With Marginal Relief | Your Savings |
| ₹12,01,000 | ₹60,150 | ₹1,000 | ₹59,150 |
| ₹12,10,000 | ₹61,500 | ₹10,000 | ₹51,500 |
| ₹12,75,000 | ₹71,250 | ₹71,250 | ₹0 (Relief Ends) |
MithVibe Insight: The “Relief” is only a temporary bandage. Once you cross ₹12.75 Lakh, you pay the full tax. This is why the Budget 2026 tax-free limit for salaried users is a double-edged sword for investors.
Don’t let your hard-earned money go to the taxman because of a math error. If you find yourself in the ‘Marginal Relief’ zone, use that saved ₹50,000 to invest in your business. Buying Retouch4me AI plugins is a deductible business expense for freelancers, meaning you save on taxes while 10x-ing your productivity.
What is the Budget 2026 tax-free limit for salaried employees?
The Budget 2026 tax-free limit for salaried employees is effectively ₹12,75,000 under the New Tax Regime. This includes a standard deduction of ₹75,000 and a full tax rebate under Section 87A for net taxable income up to ₹12 Lakh. However, this “zero-tax” status only applies if the taxpayer has no income from capital gains or other special-rate sources.
How to apply for the Budget 2026 AI Skilling Grant?
The Budget 2026 AI Skilling Grant is part of a ₹500 Crore initiative to professionalize India’s workforce. To benefit:
- Target MSMEs: Micro and small businesses can claim subsidies for adopting AI infrastructure.
- Educational Credits: Individual professionals can access “Compute Credits” for GPU/TPU hours via the IndiaAI Mission.
- Tax Deductions: Invest in AI software like Retouch4me as a professional business expense to lower your taxable income while upskilling.
Budget 2026: The “Smart Taxpayer” 5-Point Checklist
If you want to survive the Section 87A Mutual Fund Trap and maximize your savings before the financial year ends, follow these five steps:
- Audit Your LTCG: Check your Mutual Fund and Stock sales for the year. If your salary is ₹11.5 Lakh but your LTCG is ₹60,000, you have officially hit the LTCG tax on ₹12 lakh income trap.
- Delay Your Redemptions: If you don’t need the cash immediately, avoid selling equity before March 31, 2026. Keeping your income under the Budget 2026 tax-free limit for salaried users (₹12 Lakh) will save you ₹60,000 in one shot.
- Claim Marginal Relief: If you have already crossed the limit slightly (e.g., ₹12.1 Lakh), ensure your CA or tax software applies the Section 87A Marginal Relief 2026 calculation. This can reduce your tax from ₹60,000 down to just a few thousand.
- Leverage the AI Skilling Grant: With the government’s new ₹500 Crore focus on AI, 2026 is the year to professionalize. If you are a freelancer or business owner, software like Retouch4me isn’t just a tool—it’s a deductible business expense that lowers your taxable income.
- Re-evaluate the New Tax Regime vs Mutual Funds 2026: If you have heavy investments, the Old Tax Regime (with 80C deductions) might still be cheaper for you. Always run a side-by-side comparison before filing.
Final Pro-Tip for MithVibe Readers
“The best way to beat a tax hike is to increase your income without increasing your work hours. While you navigate the Standard Deduction Hike Jan 2026 news, don’t ignore your most valuable asset: Time. > By investing in Retouch4me AI plugins today, you are essentially ‘tax-deducting’ the hours you used to spend on manual editing. Use our exclusive link below to get the best pre-budget discount and turn your tax anxiety into a professional upgrade.”
As we analyze the Budget 2026 tax-free limit for salaried individuals, it’s clear that the government is pushing a dual agenda: middle-class relief and a massive leap toward an AI-driven economy. However, the Section 87A Mutual Fund Trap reminds us that financial literacy is our best defense.
To stay ahead of these shifts, you need to look at the broader picture. For instance, understanding the rise of Agentic AI is crucial, as the government has earmarked specific funds for AI infrastructure this year. This policy isn’t just about numbers; it’s about overcoming the AI skills gap to ensure Indian professionals remain globally competitive.
Smart Reinvestment Strategies
If you manage to use the Section 87A Marginal Relief 2026 to save on your tax bill, consider reinvesting those savings into future-proof tech. Whether it’s optimizing your trading setup with real-time market data analysis or upgrading your home with solar-powered gadgets to beat rising utility costs, smart spending is the best “standard deduction.” Even small lifestyle changes, like switching to safe air fryers for 2026, can be seen as an investment in your long-term “human capital.”
Official Sources
Official Tax Slabs: Income Tax Department of India – Tax Rates FY 2025-26
Market Analysis: The Economic Times – Budget 2026 Live Expectations
LTCG Guidance: ClearTax – Guide to Section 112A and Capital Gains
Budget Context: Department of Economic Affairs – Budget Circular 2026-27
Is income up to ₹12 Lakh truly tax-free in Budget 2026?
Yes, under the New Tax Regime, resident individuals with a net taxable income up to ₹12 Lakh pay zero tax due to the ₹60,000 rebate under Section 87A. For salaried employees, this effectively makes income up to ₹12.75 Lakh tax-free after the ₹75,000 standard deduction.
What is the Section 87A Mutual Fund Trap?
The “Trap” refers to a rule where the Section 87A rebate (which makes income up to ₹12 Lakh tax-free) does not apply to “special rate” incomes like Long-Term Capital Gains (LTCG) from equity. If you have any such gains, you lose the rebate on that portion, which can trigger a massive tax bill even if your total income is under the limit.
How does Section 87A Marginal Relief 2026 work?
Marginal relief ensures that if your income slightly exceeds the ₹12 Lakh threshold (up to roughly ₹12.75 Lakh), your tax liability will not exceed the extra income earned over ₹12 Lakh. It prevents a “tax cliff” where a small raise leads to a large tax payout.
What is the current LTCG tax on ₹12 Lakh income?
If your total income is around ₹12 Lakh, any Long-Term Capital Gains (LTCG) from listed equity exceeding ₹1.25 Lakh are taxed at a flat rate of 12.5%. Crucially, you cannot use the Section 87A rebate to offset this specific tax.
Will the Standard Deduction hike to ₹1 Lakh in Jan 2026?
As of late Jan 2026, the standard deduction under the New Tax Regime stands at ₹75,000. While there are strong expectations for a hike to ₹1 Lakh or ₹1.25 Lakh in the upcoming Feb 1 Budget, taxpayers should wait for the official announcement.
New Tax Regime vs Mutual Funds 2026: Which is better?
The New Tax Regime is generally better for those earning up to ₹12.75 Lakh with no major deductions. However, if you have significant Mutual Fund gains, the “87A Trap” might make the Old Tax Regime more viable if you can claim 80C, 80D, and HRA deductions.
Can NRIs claim the Section 87A rebate?
No. The Section 87A rebate is exclusively available to Resident Individuals. Non-Resident Indians (NRIs) must pay tax according to the slab rates without the benefit of this rebate, regardless of their total income.
What is the ₹500 Crore AI Skilling Grant mentioned in Budget 2026 news?
The government has proposed a ₹500 Crore outlay for “Centres of Excellence in AI for Education.” This grant aims to subsidize AI training for MSMEs and students to bridge the AI skills gap in the Indian workforce by 2026-27.
How do I calculate tax if my income is ₹12.1 Lakh?
n this case, your tax before relief would be roughly ₹61,500. However, thanks to Section 87A Marginal Relief, your tax is capped at the “extra” income (₹10,000). So, you would pay ₹10,000 plus cess, instead of the full slab rate.
Are AI software like Retouch4me tax-deductible?
Yes. For freelancers, photographers, and business owners, purchasing AI tools like Retouch4me is considered a business expenditure. This helps reduce your “Net Taxable Income,” potentially bringing you back under the ₹12 Lakh threshold to save on taxes.
